Auto industry welcomes diesel price hike plan

The contribution of diesel cars to total car sales surged to 58% in 2012 from 28% in 2010, according to SIAM. Photo: Pradeep Gaur/Mint

Updated: Fri, Jan 18 2013. 12 10 AM IST

New delhi: India’s automobile industry welcomed the government’s move to allow oil marketing companies (OMCs) to decide on changing diesel prices in increments to bring them closer to market rates.

The passenger vehicle industry has witnessed market dynamics changing after the decontrol of petrol in June 2010. The price differential between petrol and cheaper diesel has led to distortions, resulting in unnaturally high demand for diesel cars, according to the Society of Indian Automobile Manufacturers (SIAM) lobby group.

“This is a good move and may allow the OMCs to bring the price of diesel (closer) to market (rates). This will essentially remove the distortion between diesel and petrol,” said Sugato Sen, SIAM deputy director general. “All the talk of the rich getting benefited due to the subsidy on diesel will go away. Companies will not have to wait for policy (changes) to take decisions.”

The contribution of diesel cars to total car sales surged to 58% in 2012 from 28% in 2010, according to SIAM.

The combined investment by these two firms in diesel technology amounts to at least Rs4,000 crore.

After a meeting of the Cabinet committee on political affairs on Thursday, oil minister M. Veerappa Moily said OMCs have been permitted to raise diesel prices by a small quantum periodically till they are able to cover the loss they incur on the fuel, now Rs9.60 per litre.

In fiscal 2011-12, state-run oil refiners lost Rs80,000 crore of revenue on account of selling diesel below cost price. In Delhi, petrol costs Rs67.56 a litre and diesel is priced at Rs47.15 a litre.

The price differential, which widened after the steep hike in petrol rates in May, has led to the proportion of diesel cars rising as the cheaper fuel offsets the higher cost of the cars. Owners of diesel-powered vehicles made by Mercedes-Benz India Pvt. Ltd, BMW India Pvt. Ltd, Audi India and Mahindra and Mahindra are beneficiaries of a subsidy aimed primarily at farmers to allow them to run irrigation pumps and tractors.

Sen of SIAM said that while there may be some impact on the sales of diesel cars in the near term, from a long-term perspective, the move augurs well for the industry.

“Diesel has its inherent advantages. Despite periodic increases, it will still be cheaper than petrol and diesel-run cars give higher mileage. These two factors will ensure that the demand for diesel cars will continue in future,” Sen said.

The government had refrained from imposing higher excise on diesel vehicles in the budget despite pressure to curb its rising subsidy bill.

The government loses potential tax on every new diesel car sold. It had toyed with the idea of differential pricing of diesel for passenger cars, commercial vehicles and other uses, but dropped that plan as it feared such a dispensation would be misused and lead to adulteration.